Greenspan keeps secrets of success

Penchant for mystery imperils gains, Blinder says

JACKSON HOLE, Wyo. (MarketWatch) -- Federal Reserve chief Alan Greenspan's legacy is in jeopardy in part because the secret of his success as a central banker remains a secret, even to the people who worked with him, said former Fed Vice Chairman Alan Blinder on Friday.

"When the next leader of the Federal Reserve takes his seat behind the chairman's desk and opens the top drawer in search of Alan Greenspan's magic formula, he will be sorely disappointed," Blinder wrote in a paper to be delivered at the annual Fed conference to mark the departure of the man who's led the Fed for 18 years. Read more about Greenspan's legacy.

This secrecy was, in large part, Greenspan's choice, Blinder said in his prepared text.

"It is too bad that he has not seen fit to share more of what he apparently knows with staff, [Federal Open Market Committee] colleagues, economists, and the broader public," Blinder said.

This endangers a lasting legacy because his successors won't know how to replicate his success, Blinder said.

Blinder is now an economics professor at Princeton. His colleague at Princeton, Ricardo Reis, co-authored the paper.

In his paper, Blinder attempted to be the sorcerer's apprentice and create, at least in outline form, a possible magic 'Greenspanian' formula for the next Fed chairman to follow.

Blinder said the next Fed chief should follow Greenspan's example by keeping all his options open and avoiding doctrinal straitjackets.

His successor should try to emulate Greenspan's abhorrence of policy reversals and his healthy distrust of economic forecasts. A risk management approach to monetary policy is also preferred, Blinder said.

This approach led him to develop a clear preference for gradual rate moves, Blinder said.

Another Greenspan tenet is that the Fed should not attempt to burst asset bubbles, like the stock market of the last 1990s and possibly the housing market today. It is far better for the Fed to "mop up" after a bubble bursts, Blinder said.

Perhaps the best guideline for the next Fed chief would be to "talk modestly but set his sights high," Blinder concluded.

On several occasions, Greenspan's decisions had tremendous social benefits for the U.S. economy, Blinder said.

Greatest central banker who ever lived

Greenspan has a legitimate claim to being the greatest central banker who ever lived, he said.

"His performance as chairman of the Fed has been impressive, encompassing, and overwhelmingly beneficial - to the nation, to the institution, and to the practice of monetary policy," Blinder said.

His desire for secrecy was only one of two mistakes, he said.

The other mistake was Greenspan's penchant to comment broadly on politically sensitive topics outside of the scope of monetary policy.

These comments hurt the independence of the central bank, Blinder said.

The next Fed chairman "would be wise to forsake this aspect of the Greenspan record and - to the maximum extent possible - keep his views on most non-monetary matters to himself," Blinder said.

In the end, it is not too late to rectify the problem of secrecy, Blinder noted.

"Alan Greenspan is only leaving the Fed, not the planet. Maybe he should deliver the main paper at the next Jackson Hole conference," Blinder said.

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